Business lending drops by £4.7bn

2 June 2009 12:59pm

Doubts over the Bank of England's efforts to boost the money supply and ease the recession were emerging after figures showed lending to businesses fell by almost £5 billion in April.

The Bank's figures on money supply for April - two months into its historic £125 billion quantitative easing (QE) programme - showed private companies still facing a squeeze.

According to the data, M4 lending - such as loans and overdrafts - to firms dropped £4.7 billion or 0.9% between March and April. This took the annual rate of lending growth down to just 0.8%.

Colin Ellis, European economist at Daiwa Securities, said the figures were "the clearest indication yet" that the Bank's quantitative easing policy - effectively printing money to buy up debt and bonds - is not yet having an impact on money and credit growth.

"It is still early days, but that could imply that the Monetary Policy Committee ends up having to ramp up its purchases even further - something that, at the same time, could further heighten concerns about future inflation," he said.

The Bank will begin its two-day policy meeting on Wednesday, with most experts expecting interest rates to be held at a record low of 0.5% and the level of purchases under QE to be held at £125 billion after a surprise £50 billion boost last month.

The data will also fuel concerns that banks are still not boosting their lending despite commitments made by some to the Government in return for taxpayer support - as well as sitting on the new money created by the Bank under QE to strengthen their finances.

Growth in lending to households remained largely unchanged month-on-month - up by 0.2% - although the annual rate of growth eased lower to 3.4%.

But overall lending to households and businesses was down 0.1% between March and April - the worst month-on-month result since figures began in 1997, Mr Ellis added.

Growth in households' holdings of M4 - bank and building society deposits and cash - fell to just 0.1%, which could signal increasing pressure on finances as unemployment mounts, as well as decisions by households to pay down debts.

© The Press Association